Federal Reserve Chairman Jerome Powell speaks to reporters after the Federal Reserve lowered interest rates in an emergency test designed to protect the world’s largest economy from the impact of the coronavirus, during a news conference in Washington, DC, March 3, 2020.
Kevin Lamarque | Reuters
Fed Chairman Jerome Powell eased markets on Wednesday and moved back against speculation that the central bank could begin to repel its easy policies.
The Federal Reserve on Wednesday sharply increased its prospects for economic growth, but indicated that it still does not see any interest rate hikes until 2023. He also expects higher inflation this year, but only temporarily.
In the press, Powell reinforced the message that the Fed will not soon move away from zero interest rates or its bond purchases. His remarks allayed concerns from market professionals that the central bank will soon discuss the winding up of some of its facilitation programs.
The futures market has also started raising interest rates in 2023.
“I thought it was one of the best press conferences we’ve seen from Powell,” said Jim Caron, head of global organizing strategy at Morgan Stanley Investment Management.
“He got up there and jerked it off and said, ‘This is what we do. This is what’s going on. I said patiently and I meant it,'” Caron said. “Wow, accomplish mission.”
Stocks climbed after Powell’s comments
Caron said the “reflection trading is intact”, and Powell avoided the market downturn that occurred during previous comments.
“The last time he talked 10-year returns started rising to 1.50%,” Caron said. “Everyone expected him to talk things out, and he did not.”
Caron added that the pricing of options indicates that investors expect the central bank’s meeting and Powell’s press briefing to have led to one of the most volatile Fed events in months.
But the markets were relatively calm.
Treasury yields came down from the highest point of the day and equities rose higher. The Nasdaq Composite reversed its losses to 0.4%. The Dow Jones industrial average closed above 33,000 for the first time and ended the day with a record 33,015, a gain of 0.6%.
“What I’m telling you is the attitude of the monetary policy we have today, we think is appropriate,” Powell said during his press briefing.
Although it has been speculated that the Fed would indicate that it would be willing to reverse its bond purchases, Powell said this would only happen before economic data ‘made significant progress’.
An improving outlook and no decline
Bond yields rose higher due to the improving economic outlook, the expected boost to the $ 1.9 billion fiscal stimulus package, as well as concerns that inflation could heat up.
The ten-year yield has risen over the past six weeks from about 1.07% to a high of 1.68% earlier Tuesday. The yield, which moves opposite price, was 1.64% late in the day.
Gross domestic product is expected to rise by 6.5% in 2021 before slowing down later, according to updated forecasts from members of the Federal Open Market Committee.
The biggest thing Powell has said is that the Fed is not afraid of the inflationary boogeyman.
Michael Arone
Chief Investment Officer at State Street Global Advisors
“I think the market was looking in a few directions and just trying to understand how far the Fed would improve its view, based on an additional $ 2 billion stimulus,” said James McCann, senior economist at Aberdeen Standard Investments. said. . “What the Fed did not do is not cut.”
The pressure was to go to the meeting. Goldman Sachs economists said in a note that the meeting “would be one of the most important events for the Fed in some time”.
Powell reiterated that the Fed is not ready to tap.
“Until we give a signal, you can assume we’m not there yet,” he said. “If we approach it early, early, we will give a sign that we are yes, we are on the path to achieving it, and to consider tapping it.”
Walk a fine line
Greg Faranello, head of US rates at Amerivet Securities, said Powell managed to walk a fine line during his information session.
He said the market was acting as if it was coming in Powell’s opinion. The ten-year treasury yield has fallen and the yield curve – or the difference between rates at different maturities – has leveled off, Faranello said.
“He’s a maestro himself. He’s because of what he’s managed to say … ‘we want higher inflation. We want higher growth … we want all these things and we also want rates “Faranello said. ‘Without doing anything – think about it – he got it.’
Michael Arone, chief investment strategist at State Street Global Advisors, said the Fed’s message on inflation was not an issue, helping turn the Nasdaq around.
“The biggest thing Powell has said is that the Fed is not afraid of the inflation boogeyman,” Arone said.
“He described inflation this year as ‘transient’ and not transient in nature as everyone says. And then he sees it falling,” Arone added. “As a result, you see rates fall and the Nasdaq skyrocket.”